Students protesting about tuition fee increases in central London last year.
Photograph: Alamy

The defining moment of this year’s general election was when a nurse who said she hadn’t had a real-terms salary increase for eight years asked the prime minister about pay awards in the public sector. Live on television, Theresa May reached for the default answer that “there is no magic money tree that we can shake that suddenly provides for everything people want”.

The memorable phrase is shorthand for saying that not all public spending can be paid for with additional borrowing. Of course, after the election, when the Tories needed to secure the support of the Democratic Unionist party, £1bn was nonetheless found down the back of a sofa in Downing Street.

The election was also defined in part by university tuition fees. If there is one aspect of public spending that looks suspiciously like a magic money tree of unconstrained borrowing it is student loans. They are a bad deal for students but a worse deal for the taxpayer.

The Student Loans Company is in charge of £100bn of debt for six million borrowers. This is a huge sum. So, how does it work?

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The annual outlay on student loans for fees and maintenance is £14bn. The government borrows this and transforms its debt into an asset by lending it to students. The loans the government makes are its assets, its future income.

The transfer allows this part of the cost of higher education to disappear from the public spending accounts: good for deficit reduction; bad for the growing national debt.

Student loans start accruing the moment they are taken up, so from day one of freshers’ week the debt is growing. The government charges borrowers the retail prices index plus 3% – a formulation that reflects the government’s true cost of borrowing. The interest rate is currently 6.1%, driven up by inflationary pressures caused by the devaluation of sterling after the Brexit vote.

The loans do not stay as government assets for long, as they are sold to private investors. All pre-2012 loans have now been disposed of to raise revenue to spend in the here and now. The problem is that post-2012 loans perform so badly that the government cannot find a buyer, leaving the taxpayer holding the risk of poorly performing loans. And 75% of graduates will never repay in full. The continued sale of the loan book sits in the Treasury’s accounts as planned income for the next few years, but without a buyer it is not clear how the government’s sums add up.

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Borrow, loan, sell, borrow is the pattern that adds to the national debt while disposing of government assets at less than their true value. If the government were a household, it would be like buying a sofa on HP then selling it cheap on eBay to pay the grocery bill. We are storing up trouble for future generations. Young people will be hit twice: once as loan holders and then as taxpayers.

When the government introduced its teaching excellence framework to incentivise the quality of teaching in universities, it did a deal with vice-chancellors that traded participation in the Tef for annual increases in fee levels that had not grown in real terms for five years. Next year fees were due to rise to £9,500. If fees are now frozen, it leaves universities with a hole in their budgets.

The Conservatives are looking to counter the Corbyn surge among young voters. Given the high political stakes, the question of tuition fee levels has now been taken out of the hands of the Department for Education and will be made in Downing Street. Theresa May and Philip Hammond will be looking to shake the magic money tree one more time, but any give-away to students now will need to be paid for later.